The correct amount of Profit & Overhead to pay atop 3rd party suppliers

If you're planning a home renovation using third-party supplied materials, at some point you're going to encounter being charged profit and overhead from your General Contractor (GC) atop the third-party supplier's fees.

For example, say you're doing a gut renovation and installing a beautiful $50,000 kitchen you've bought and ordered from a third-party supplier, your GC will take their quote and add their full 20% markup for Profit and Overhead.

You're likely response to this is "Why am I paying $10,000 on top of my $50,000 kitchen when it is the kitchen installer who is designing, manufacturing, shipping AND installing my kitchen?"

The Real Problem

This is a very nuanced problem because it can be perceived by homeowners to be simply “contractors wanting a bigger markup” and by contractors to be simply "owners don't want to pay for my risk and overhead" but on thorough investigation it is clear that having the GC accountable and responsible for all materials on a project and paying an "appropriate" level of PnO turns out to be of enormous benefit to the homeowner and GC.

We reached out to several of our top-performing professionals and discovered that owners are typically exposed to several unknown and very real risks when they do not pay the full PnO for the GC to assist them with the arrival, protection and / or installation of owner-supplied materials (in your case, your kitchen).

Here are a few of their stories:

  • Design – An owner’s $40,000 kitchen was sent back to the manufacturer because the measurements were wrong causing a 2-month delay (sometimes walls are askew or the kitchen is manufactured with a glitch because the GC is not being paid to assist)
  • Delivery An owner’s $100,000 kitchen was not delivered on the specified delivery date nor through correct channels (GC liaising with super and elevator management) causing several delays, a fine and the loss of the owner’s $4,000 deposit with their building’s management.
  • Installation – An owner’s $50,000 kitchen was returned because a waste pipe needed to be repositioned for the kitchen in order for it to be installed correctly but the GC was unavailable.
  • Protection – An owner’s $75,00 kitchen did not have full and appropriate protection on site before it was installed and was damaged by a subcontractor costing the owner $5,000 (high-end kitchens are usually protected with a full shell of plywood that can cost the GC several thousand dollars to produce).

Bolster's Solution

Bolster has broken down the of 4 components of a supplier’s quote on a typical owner-supplied kitchen (design, product, shipping and installation) and calculated the risk from each so we can more accurately apply the GC’s PnO. This ensures both you and your GC are suitably protected against unnecessary costs, headaches and delays but with PnO only being applied to what is fair and necessary:

  1. Design: PnO is applied to just 85% of the cost of the kitchen product itself. As Kitchen installers don’t break down their design fees (they’re typically a general overhead cost spread across all of their kitchens) we assume the cost of designing a kitchen is comparable to that of the cost of a Bolster architect’s design fees which are capped at 15% and so we assume the same 15% design rate and discount it from the cost of the kitchen.
  2. Product: PnO is applied to 100% of the cost of the kitchen product itself. This is because the GC is fully exposed to the risks of the kitchen being on site and incurs significant overhead costs in protecting it.
  3. Shipping: PnO is not applied to shipping at all. The GC is neither at risk here nor is involved in the shipping of the kitchen and therefore incurs no overhead cost nor risk.
  4. Installation: PnO is applied 100% to the cost of the installation of the kitchen. This is because the GC is fully exposed to the risks of the kitchen installer crew’s safety and incurs overhead and risk associated with ensuring the installation of the kitchen is done safely and effectively.

This logic all gives the following formula:

Bolster GC markup on owner-supplied item

Here’s the formula in action on a $50,000 kitchen with a $10,000 insured shipping and delivery cost and assuming a 20% PnO rate:

20% * ($60,000 - $10,000) * 85% = $8,500

A traditional GC would charge:

20% * ($60,000 - $0) * 100% = $12,000

Our approach in this example saves you $3,500 while still ensuring your GC is fairly compensated for protecting you from the costs, headaches and delays associated with owner-supplied kitchen purchases.

 

 

Further Reading

It is important to note that if you are buying say a $50,000 kitchen from a supplier while working with a GC who is charging you 20% atop the kitchen resulting in a $60,000 total cost, the $10,000 is not actually additional but rather simply a necessary cost that you are paying to the GC rather than pay to the installer. If the GC was not involved, the installer would have to deal with permits, General Liability insurance, handling, scheduling, protections and so on and would be charging you the $10,000 (maybe even more) directly.

In the event where a supplier is installing something directly (your kitchen for example), the GC while not actually installing the item, is still responsible for their coordination into the project schedule, their site safety, protecting their workers – and his own - from injury (and subsequently you from a law suit) and protecting your property and the installed item from being damaged which they are legally responsible for fixing and typically have to so out of pocket (the GC will swallow a $15K cost to fix something rather than make a claim with their insurer who will respond by instantly increasing their premiums, a practice that makes renovating less affordable for everyone).

If it helps to better convey the value provided within this markup, the industry average net profit for a GC is just over 5%. Meaning after paying the direct costs of all material and subcontractors for your project (say 75% of the total) they will spend 20% on coordinating, delivering, handling, managing and protecting those direct costs and subcontractors which leaves 5% net profit to help grow their business.